Chinese regulators’ growing scrutiny of local companies’ overseas IPO’s –namely in the U.S.– are prompting investors to look elsewhere. Funds in China say that regulatory announcements add clarity in the security markets, but fintech firms aiming at local IPOs are also finding it hard.
Q2 2021 hedge fund letters, conferences and more
Regulators Steadily Adding Policies
With regards to the tightening in securities regulations, Michael Xu, managing partner at China-based CEC Asset Management, was quoted as saying on CNBC: “There is no impact at all on exits, investment direction and investment stage for a firm like ours.”
After Didi’s colossal IPO on the New York Stock Exchange in June, Chinese regulators are steadily lining up a set of upcoming policies to exert more control of data and the ability of companies to list overseas.
The Cyberspace Administration of China (CAC) announced on Saturday the possibility of companies that own data on more than 1 million users undergoing a cybersecurity review before listing abroad –rules proposition would close July 25.
On July 7, CAC banned ride-share app DiDi Global Inc (NYSE:DIDI) shortly after its U.S. IPO, following privacy concerns, with China’s Minister of Cybersecurity asserting: “The Chinese government does not condone non-state sanctioned spying of its citizens. Until DiDi addresses privacy and security concerns it’ll remain banned in the app store.”
Looking Elsewhere
According to Preqin, “deal value from venture capital and private equity-backed buyouts reached $74.3 billion in the first quarter of this year… That’s the most for any six-month period since the first half of 2018.”
However, Jeff Wu, a China-focused partner at Silicon Valley-based Pegasus Tech Ventures, asserts that, as China is struggling with preventing tech companies from fleeing overseas to do their IPOs, securing returns is the priority. Wu is looking to place investments via listings in Hong Kong “or special purpose acquisition companies overseas.”
To incite companies about listing at home, China launched the Star board in Shanghai in July 2019, offering a registration-based IPO process. However, financial technology companies are banned from listing, as well as “real estate and firms mainly engaged in financial services and investment businesses.”
Zhu Ning, professor of finance at Tsinghua University also says, “Chinese investors are not sophisticated enough yet, and the legal environment is not mature enough to accommodate such a registration process.”
“It’s important investors keep in their mind, China is still an emerging economy. No matter how fast-growing it is, the institutional background is still not the same,” he said.
